Last month, member states of the European Union were required to implement the European Union Commission's Fourth Anti-Money Laundering Directive ("Fourth Directive"). Among other things, the passage and ultimate implementation of the Fourth Directive represented a step towards improving the effectiveness of combating money laundering and the financing of terrorist activities. Absent from the Directive, however, is a comprehensive plan to regulate virtual currency. This absence was quickly rectified in response to the 2015-2016 terrorist attacks in Europe and the leak of the Panama Papers. In July 2016, the Commission proposed to extend the scope of the Fourth Directive to specifically include virtual currency exchange-platforms and custodian wallet-providers. The purpose of these proposed amendments was "to combat the risks related to the anonymity [that] virtual currencies" present as well as to increase transparency and address tax evasion concerns. These proposed amendments aim to bring virtual currency exchange-platforms and wallet-providers under the purview of the new AML regulations. In March 2017, the European Parliament approved these amendments and issued a report. The amendments to the Commission's initial proposal broadened the scope of regulation and specifically stated that virtual currencies can no longer be anonymous. This article will review the 2016 initial proposed amendments, EU Parliament's March 2017 report, and the implications for virtual currency.
When first enacted in June 2015, the Fourth Directive represented an overhaul of the EU AML legislation. It replaced the Third Directive. EU member states were required to come into compliance with its new mandates on July 26, 2017. According to the European Commission's press release, the Fourth Directive required member states to strengthen existing rules by, among other things:
- reinforcing the risk assessment obligations;
- setting new registration requirements regarding beneficial ownership;
- recognizing the need for cooperation and exchange of information between Financial Intelligence Units from different member states in order to identify and prevent the funding of possible terrorist activities; and
- bolstering the sanctioning powers of competent authorities.
Since enactment, EU member states have contemplated and employed varying tactics in order to comply with the Fourth Directive. For instance, in March of this year, the U.K. government created the Office for Professional Body Anti-Money Laundering Supervision ("OPBAS"), which will oversee compliance with this money laundering directive. OPBAS is supervised by the UK financial regulatory body, the Financial Conduct Authority, which recently named the professional bodies subject to OPBAS oversight authority and detailed OPBAS supervisory powers.
2016 Amendments to the Fourth Directive
Even before the Fourth Directive's enactment date, the Commission proposed additional amendments to the already far-reaching and comprehensive regulatory requirements. The July 2016 Commission-amendments aimed to enhance the powers of the EU member states' financial intelligence units and facilitate cooperation to prevent misuse of virtual currencies and pre-paid instruments for money laundering and terrorist financing purposes, and to increase oversight and due diligence measures on risky countries and on financial transactions flowing from them.
These proposed amendments are now regarded as the Fifth Anti-Money Laundering Directive ("Fifth Directive").
The Fifth Directive tackles the issue of virtual currency directly, noting that "[w]ith regard to improving the detection of suspicious virtual currency transactions, six regulatory options were examined. The option retained consists of a combination of means, namely (i) bringing virtual currency exchange platforms and (ii) custodial wallet providers under the scope of [the Fourth Directive], while (iii) allowing more time to consider options as regards a system of voluntary self-identification of virtual currency users." From this language, it is clear that the Commission contemplated the concerns regarding anonymity associated with the use of virtual currencies and expected the amendments to generate negotiations and debate regarding the issue.
In addition to the virtual currency regulations, the Fifth Directive explicitly states that its purpose is to promote stricter transparency rules to prevent tax avoidance/evasion and money laundering. To that end, one proposed solution was to allow public access to beneficial ownership registers and to interconnect these registers for the purpose of facilitating cooperation among and between member states.
Responses to Amendments
After the Commission's publication of the proposed amendments, the text underwent analysis by various advisory committees and member states. Many agencies and authorities responded to the amendments, not all favorably. Some found that the Fifth Directive did not go far enough, and others determined that it went too far. For example, at the request of the European Union ("EU") Parliament, the European Central Bank ("ECB") published an opinion in October 2016 in which it warned that the inclusion of virtual currencies in the directive would have the effect of appearing as an endorsement of the wider use of such currency. The ECB noted that virtual currency did not constitute legal tender and if its use increased, it could affect price stability. Importantly, ECB was concerned that in addition to possibly promoting the use of virtual currencies, merely including virtual currency exchange-platforms and custodian wallet-providers in the anti-money laundering framework does not address the issue of virtual currency anonymity.
The European Data Protection Supervisor ("EDPS"), on the other hand, believed that the Fifth Directive perhaps went too far and raised data privacy concerns, stating that "[p]rocessing personal data collected for one purpose for another, completely unrelated purpose infringes the data protection principle of purpose limitation and threatens the implementation of the principle of proportionality." EDPS was specifically concerned that the justification for the proposed public access to beneficial owner registers in the Fifth Directive was enhancing "transparency and the fight against tax evasion and avoidance" rather than the Fourth Directive's goal of the prevention of money-laundering and terrorism financing.
In February 2017, the Fifth Directive report was adopted by the Economic and Monetary Affairs Committee ("ECON") and the Civil Liberties, Justice and Home Affairs ("LIBE") committees of the EU Parliament, and a proposed directive was issued the following month. Notably, the report attempted to address the EDPS concerns, stating that although information held in the beneficial owner register would be publicly accessible, access must be in accordance with data protection rules and open data standards and subject to online registration. The committees did not, however, address EDPS's larger point regarding the justification of allowing public access to the registries being "transparency and the fight against tax evasion and avoidance," because it by and large maintained the Commission's focus on those elements. Indeed, LIBE noted that "[t]he EU should not miss the opportunity to further reinforce EU rules on anti-money laundering and increasing transparency, by also taking into consideration the particular needs of developing countries, which are particularly affected by the plague of illicit financial flows." The ECON committee agreed, stating that "financial and tax transparency are top priorities of the Union trade policy."
As regards virtual currency, the EU Parliament appeared to go even farther than the Commission in regulating virtual currency. Indeed, it included not only exchanges and wallet-providers, but also other types of businesses which serve, for example, as intermediaries and distributors of virtual currency and that may have no obligation currently to identify suspicious activity. While the Commission itself noted the concern with the anonymity of virtual currency, the Parliament goes further and specifically includes the statement in the definition of virtual currency that "Virtual currencies cannot be anonymous." Moreover, discussions have begun regarding whether or not the EU will require exchanges and wallet-providers to produce virtual currency users' identities and wallet addresses for registration in a central database, including potential self-declaration forms for virtual currency users. It is clear that transparency and anonymity are the focus of Parliament's amendments to the Commission's proposed amendments. Indeed, the draft bill will allow more financial regulators in the EU to collect data on digital currency users.
Parliament also addressed ECB's concerns regarding the possible interpretation of the Fifth Directive as an implicit sanction or approval of virtual currency. In addition to precluding the anonymity, the virtual currency definition now reads: "Virtual currencies means a digital representation of value that is neither issued by a central bank or a public authority, nor attached to a legally established currency, which does not possess the legal status of currency or money, but is accepted by natural or legal persons as a means of exchange or for other purposes, and can be transferred, stored or traded electronically." The next step in the legislative process is for the amended text to be submitted to the EU Council for review.
Fueling this onslaught of regulation is the perception that terrorist organizations utilize virtual currencies to launder gains derived from illegal activity and fund terroristic endeavors. This is all to say that while the future of virtual currency regulation remains in flux, new regulations are no doubt in the near future.